Carlyle ventures into Europe's ailing refining sector

A general view of the lobby outside of the Carlyle Group offices in Washington, May 3, 2012.Jonathan Ernst

VIENNA (Reuters) - Private equity giant Carlyle Group (CG.O) made a surprise foray into Europe's struggling refining sector by teaming up with Swiss trading house Vitol VITOLV.UL to co-own refining, storage and distribution assets in Switzerland and Germany.

Carlyle, which has $185 billion globally under management, and Vitol, the world's largest oil trader, launched on Thursday a 50/50 venture Varo Energy, which bought 45 percent in Germany's 260,000 barrels per day Bayernoil refinery from Austrian group OMV (OMVV.VI).

Varo already owns the 68,000 bpd Swiss refinery Cressier and storage facilities in the port of Antwerp and Germany.

"Carlyle is committed to the creation of this major new midstream energy business in North-West Europe. It offers an exciting opportunity to combine our international oil and gas experience with the resources we have available in Carlyle's global energy platform," Marcel van Poecke, Managing Director and Head of Carlyle International Energy Partners (CIEP), said.

Van Poecke previously ran AtlasInvest, an investment holding company, which had a minority stake in Varo Energy venture with Vitol. The stake was bought out by Carlyle. The cost of the deals was not disclosed. Van Poecke was also one of the early founders of independent refiner Petroplus, which went bankrupt two years ago because of heavy debt and low profit.

The bankruptcy marked a steep downturn in the fortunes of Europe's refining sector. At least a further 10 percent of Europe's 15 million barrels per day refining capacity is expected to close by 2020 due to weak demand and increased competition with modern U.S., Asian and Russian plants.

However, signs are growing that hedge funds and private equity are entering some struggling sectors - like shipping - betting valuations have reached their bottom.

"I have a feeling the low asset values and anticipation of forthcoming rationalization and capacity closures suggest opportunities for those with deeper pockets prepared to stay the course," said Stephen George from KBC consultancy.

"We have said for some time that we thought private equity, and groups like Carlyle in particular, were likely to be looking for opportunities," he added.

CRITICAL MASS

Vitol made a foray into refining last year through the purchase of Cressier and rival Gunvor also bought refineries.

Vitol's chief Ian Taylor has said that even though refining assets could be loss-making at the moment, they offer flexibility that trading divisions requires.

"This transaction will enable Varo Energy to benefit from the synergies of consolidation and an extensive storage and distribution network," Taylor said on Thursday.

George from KBC said he believed both Cressier and Bayernoil had geographical advantages in Swiss and German markets, which are usually short products.

"Also, Bayernoil helps Varo to build some critical mass in the region and possibly to create some trading plays between refineries in the region," he said.

Earlier this year, Carlyle, which invests in sectors ranging from aerospace and defense to media and telecoms, made its first $200 million investment in oil and gas exploration company Discover Exploration in New Zealand.

"It was a great chance to buy one of the best refineries in Europe at an attractive price from a motivated seller," a Carlyle spokeswoman said.

The Bayernoil sale completes OMV's plans to reduce annual capacity by around 20 percent to around 350,000 bpd with the aim of raising 1 billion euros by the end of 2014.

OMV said it expected the Bayernoil deal to close next year, subject to the non-exercise or waiver of pre-emption rights by the existing co-shareholders, and merger clearance.

"I will be interested to see if there are any pre-emptions here - it will depend on the price agreed with Varo. If it's relatively low, it might tempt one of the other existing partners to up its stake," said George.

OMV will continue to operate three refineries in Schwechat, Austria, Burghausen, Germany and Petrobrazi, Romania.

"The filling station business in Germany remains an important business area for OMV. Therefore, the transaction with Varo Energy contains contractual arrangements for the future supply of the OMV retail stations in Germany," it said.

($1 = 0.7266 euros)

Additional reporting by Simon Falush, writing by Dmitry Zhdannikov,; Editing by Michael Shields and David Evans